The Hellhound of Wall Street

by Michael Perino

  When Glass reintroduced his bill on March 9, 1933, some bankers—if only in a vain attempt to restore a semblance of their tattered reputations—were already on board. Winthrop Aldrich, the chairman of Chase National Bank, urged Congress to pass legislation to reform the banking sector and he pledged to divorce Chase from its securities affiliate. “The spirit of speculation,” he declared, “should be eradicated from the management of commercial banks.” James Perkins, who was doing everything he could to clean up City Bank’s sullied image, met with Roosevelt at the White House on the first day of the national banking holiday and promptly announced that his bank would get rid of the National City Company.

  Not everyone in the banking community, however, was so amenable to reform. W. C. Potter of the Guaranty Trust called Aldrich’s move the “most disastrous” one he had “ever heard from a member of the financial community.” J. P. Morgan Jr. predicted that separation of investment and commercial banking would seriously undermine his firm’s ability to provide capital for America’s future growth. Anger over City Bank’s misuse of its affiliate effectively muted these concerns. “To reverse a popular saying of the day,” wrote the SEC historian Joel Seligman, “the period of the First Hundred Days of the Roosevelt administration was that rare time when money talked and nobody listened.”11

  Ironically, just as City Bank had created the final impetus for Glass- Steagall, its successor created the final impetus for its repeal more than six decades later. Separation of commercial and investment banking officially remained in place until 1999, when President Clinton signed the law repealing those provisions of Glass-Steagall. Unofficially, strict separation had already slowly begun to erode in the 1980s and 1990s. The financial industry and a chorus of academic critics attacked it as an ill-conceived, anachronistic, and unnecessary restriction standing in the way of financial institutions trying to diversify their businesses and compete on the global stage. In response, federal banking regulators and the courts slowly began to permit commercial banks to engage in securities-related activities and then allowed bank holding companies to acquire investment banking subsidiaries.

  Those trends culminated in the 1998 merger of Citibank, as it was then known, and the Travelers Group. Citigroup was immediately the world’s largest financial services company, a full-service firm that combined consumer, commercial, and investment banking with insurance and investment management. The scale of this new financial department store—it had nearly $700 billion in assets and $50 billion in revenue at the time the deal was announced—was enormous, far larger than Charles Mitchell could ever have envisioned. Efforts to repeal Glass-Steagall had been kicked around in Congress for a decade, but the announced merger suddenly made them a legislative priority, with Citigroup leading the push for abolition of those Depression-era restrictions. Federal regulators had permitted the merger, but if Glass-Steagall remained the law, they would have required the combined company to shed many of its nonbanking businesses. Repeal foreclosed that contingency, which was all to the good as far as many commentators were concerned. Citigroup, two business writers noted in 2002, “is so well-diversified that there seems little chance of it running into crippling financial problems.”12

  Back in 1933, the most controversial provision of the Glass-Steagall bill was not the elimination of securities affiliates, but the creation of federal deposit insurance. When the Michigan senator Arthur Vandenberg called for a federal deposit guarantee as the City Bank hearings were winding down, it was far from a novel proposal. Over the previous fifty years, 150 bills guaranteeing bank deposits had been introduced in Congress, and every one of them was defeated. Representative Henry Steagall, an Alabama Democrat, introduced one of the last proposals in April 1932, telling then Speaker of the House John Nance Garner that it was a potent political weapon in a climate of cascading bank failures.

  “You know,” he warned, “this fellow Hoover is going to wake up one day and come in here with a message recommending guarantee of bank deposits, and as sure as he does, he’ll be reelected.” Hoover, of course, never did, and Steagall’s proposal never made it out of the House. Garner, however, was now vice president, and he told Roosevelt the provision was necessary to restore confidence in the banks. “You’ll have to have it, Cap’n,” Garner told the president. “The people who have taken their money out of the banks are not going to put it back without some guarantee.”

  Roosevelt disagreed. He held his first press conference before the banks were reopened and he told reporters that he was opposed to deposit insurance. After the Panic of 1907, eight states had tried it and in eight states the system had either collapsed when too many banks failed or the measure had been declared unconstitutional. Like the bankers, Roosevelt saw the proposal as requiring stronger banks to subsidize weaker ones, thereby creating disincentives for prudent management. Throughout the debate, Roosevelt continually threatened to veto any bill that contained an insurance provision, but he eventually succumbed to the overwhelming political pressure. Deposit insurance ultimately proved to be one of the finest innovations of the New Deal. Even the economist and ardent free-market proponent Milton Friedman recognized it as “the most important structural change in the banking system to result from the 1933 panic.”13

  Ever since the inauguration, Richard Whitney, well aware of the strong public distaste for the financial community, had quietly been making the case that federal regulation of the exchange was unnecessary. Repeating much the same strategy it had employed with Hoover, the exchange adopted a number of reforms to head off any proposals. When the Pecora hearings recessed for the summer, Wall Street stepped up its offensive by launching a direct assault on the already passed Securities Act. The legislation, it argued, was drying up capital and undermining economic recovery because legitimate investment banks and issuers were so afraid of liability that they were forgoing offerings. Roosevelt scoffed at those claims, as did Frankfurter, who argued that Wall Street was looking “not to improve but to chloroform the Act.” Indeed, Frankfurter was convinced that the dearth of new securities offerings was not the result of fear of liability, but the product of a bankers’ strike. Roosevelt held firm, even though more-conservative members of his administration were also urging amendment. “There will be,” the president told reporters, “mighty few changes, if any, in the Securities Act this winter.”

  The president could afford to maintain a strong stance against the financial community because he was still getting plenty of ammunition from Pecora. As the hearings resumed in the fall of 1933, the lawyer continued to show bankers behaving badly. Among the most shocking disclosures concerned Albert Wiggin, the former chairman of Chase National Bank, City Bank’s longtime rival. Pecora carefully showed how Wiggin had used a series of privately owned corporations to surreptitiously trade Chase’s securities. In the midst of the 1929 crash, Wiggin was part of the group of Wall Street leaders who tried to prop up the market. Or at least that was what the public thought. In reality, Pecora showed that at the same time Wiggin was actually shorting Chase’s stock (in effect betting that the price of the stock would continue to drop) on money he borrowed from Chase. Wiggin had once been one of the most popular bankers on the Street, but the disclosures thoroughly destroyed his reputation.

  Whitney continued trying to thwart Pecora’s investigation. The stock exchange president was furious when Pecora hired John Flynn, a reporter and persistent exchange critic, as an investigator. When Flynn showed up at the exchange with a questionnaire that Pecora wanted delivered to all exchange members, Whitney was so mad that he actually had to leave the room to compose himself. When he returned he was dismissive. “You gentlemen are making a great mistake,” he declared. “The Exchange is a perfect institution.”

  When the Securities Exchange Act was proposed, in early 1934, Whitney led the fight against it. The atmosphere had changed substantially in a year. The economy’s precipitous decline had been arrested, and anger at Wall Street was no longer white-hot, making the exchange lea
der’s efforts all the more effective. Whitney rented a house in Washington (nicknamed the Wall Street Embassy) and railed against the proposed bill, claiming it would “destroy the free and open market for securities” and turn Wall Street into “a deserted village.”

  Backing Whitney were the leaders of the regional stock exchanges that then dotted the country. Eugene Thompson, head of the Association of Stock Exchanges, testified that the bill was the equivalent of curing a case of hiccups by “severing the head of the patient.” Letters and telegrams flooded congressional offices as business leaders, whom Roosevelt had alienated in his first year in office, lined up to oppose the bill. General Electric’s chief executive, Gerard Swope, said that passage would be a “national disaster,” while the former Federal Reserve chairman Eugene Meyer predicted it would lead to “state control of industry.” The Republican congressman Fred Britten was even more hysterical, claiming the object of the bill was to “Russianize everything worthwhile.” As the hue and cry intensified, the initially overwhelming editorial support for the bill melted away.

  It was, by far, the biggest fight yet against a New Deal measure, and it was at least partially successful. The initial bill was redrafted, some of the provisions that Wall Street found the most objectionable were eliminated or carved back substantially, and Roosevelt even agreed to make the Securities Act less severe. In many controversial areas, the statute mandated nothing, but simply delegated authority to an administrative agency (originally the Federal Trade Commission) to write rules addressing the subject. But Roosevelt refused to back down further, asserting that “the country as a whole will not be satisfied with legislation unless such legislation has teeth in it.” Fighting over the bill lingered into the spring, but the president finally signed it on June 6, 1934.

  The Securities Exchange Act for the first time required stock exchanges to register with the federal government and submit to the oversight of the new administrative agency the act had just created, the Securities and Exchange Commission. The statute also imposed some federal control over margin trading, restricted stock pools and other forms of manipulation, placed strict limits on corporate insiders trading in their own securities, and created a system under which companies that trade on the exchanges are required to periodically disclose material information to investors. The federal government, Will Rogers noted, had finally managed to put “a cop on Wall Street.”14

  Peter Norbeck was on the sidelines for almost all the action. He lost the chairmanship of the Senate Banking and Currency Committee on March 4, 1933, and moved out of the spacious offices adjoining Room 301. When the committee discussed who the counsel for the investigation should be in the next Congress, Norbeck praised Pecora’s work. It was Pecora’s efforts, he told the committee, that were responsible for the investigation’s excellent results. Still, for all his good words, Norbeck seemed more than a little resentful about the plaudits Pecora was earning. A year earlier Norbeck believed the investigation was his best chance to accomplish something of lasting importance in Washington. Some, like John Flynn, the muckraking financial journalist who worked for Pecora, agreed. “It was Norbeck,” Flynn wrote in 1934, “big, honest, calm, filled with common sense, who made this investigation of Wall Street, who kept doggedly at the probe . . . and who, more than any other man, gave to the investigation its tone, its character, and direction.”

  Even Flynn, however, acknowledged that Norbeck’s biggest contribution was his good sense in hiring Pecora. Norbeck was a savvy politician, and he knew who would get credit for Mitchell and for everything else that would thereafter come down the pike. The results, he said, were more important than the credit, but he clearly regretted that despite his hard work he would never be known as the senator who uncovered Wall Street’s sins. “It is now being referred to generally as ‘Pecora’s investigation,’” he wrote Stewart near the end of March 1933, “but that part is natural.”15

  With his move to the minority, Norbeck lost most of his power and influence. The substantial Democratic majority did not need his vote to pass legislation. He had not supported Roosevelt like some of his progressive colleagues and so the president had no need to reward him. Old-guard Republicans thoroughly distrusted him. Peter Norbeck was very much alone in the Seventy-third Congress. Although he came to support much of the New Deal legislation, he was instrumental in passing none of it, not even Roosevelt’s farm relief laws—the kind of laws he had spent a decade trying to enact. But he was a strong advocate for Roosevelt’s securities legislation, telling his colleagues, “We have got to break down every crooked organization so that we can throw the fear of God into them and let them know there is a law in the land.”

  By 1936, Norbeck had even changed his mind about Roosevelt. He praised the president for “introducing a little humanity into government . . . where it has been outlawed from some time.” Breaking with his party, the South Dakota senator endorsed the president’s reelection in 1936. It was one of his last political acts. At the time of the endorsement he was battling malignant tumors in his mouth and jaw, and he died back home in South Dakota on December 20, 1936.16

  In March 1938, Richard Whitney was indicted for embezzlement. It was a shocking downfall for the face of Wall Street and an enormous scandal for the financial community given Whitney’s veneer of rectitude and his persistent admonitions that federal regulation of the exchange was unnecessary. “Wall Street,” the Nation wrote, “could hardly have been more embarrassed if J. P. Morgan had been caught helping himself from the collection plate at the Cathedral of St. John the Divine.” Even Roosevelt was shocked. “Not Dick Whitney!” the president reportedly exclaimed. “Dick Whitney—Dick Whitney, I can’t believe it.”

  With his New Jersey estate and East Side town house, it was enormously expensive for Whitney to maintain the lifestyle of a proper country squire. Even worse, he had an irresistible penchant for speculative stocks. In 1926 Whitney used over $100,000 in securities from his deceased father-in-law’s estate as collateral for a loan to prop up his sagging portfolio. Whitney’s money troubles worsened after the crash, even after he borrowed millions from his brother, the Morgan partner George Whitney, and virtually anyone else on the Street he could hit up. In 1930, Whitney, who was treasurer of the New York Yacht Club, took $100,000 of the club’s securities as collateral for even more loans. The pattern continued until 1937, when Whitney lifted bonds and cash from the stock exchange’s Gratuity Fund, a trust for the widows and orphans of exchange members.

  On Monday, April 11, 1938, he was sentenced to five to ten years in New York State prison. On Tuesday, a huge crowd gathered to catch a glimpse of the handcuffed Whitney as he left the Tombs in Lower Manhattan. Five thousand more waited at Grand Central Station, where Whitney was put on a train for the trip up the Hudson River to Sing Sing, along with two extortionists, an armed robber, and a rapist. When he arrived, Whitney passed through yet another crowd surrounding the prison gates. Once inside, he exchanged his blue serge suit, polo coat, and gray felt hat for ill-fitting prison garb and became prisoner 94835. His fellow prisoners were in awe; several raised their caps or stepped aside as he walked past and one sacrificed his sheets so that Whitney, who didn’t have any yet, would not have to go without. Even the guards were respectful. “All men who came in Thursday, Friday, Saturday, Monday or Tuesday,” one guard growled, “and Mr. Whitney, please step out of the cells.”

  Whitney was by all accounts a model prisoner—at first assigned to mop-ping and general cleanup, he eventually taught in the prison school and played first base for the prison baseball team. Indeed, in 1938 Whitney’s old Groton headmaster, Endicott Peabody, paid him a visit. Peabody was the same headmaster who led the prep school when the young Franklin Roosevelt was there, and he asked Whitney the same thing that he asked the president when he called—was there anything he could do? “Yes,” Whitney replied, “I need a left-handed first baseman’s mitt!” Whitney was released from prison in August 1941, the earliest date on which he was eligib
le for parole. His ever loyal brother, George, paid back everything that Dick Whitney had borrowed or embezzled. Barred from the securities industry, his estate and other properties auctioned off to pay creditors, Dick Whitney briefly managed a Cape Cod dairy. He spent the remainder of his life in Far Hills, New Jersey, and died on December 5, 1974.17

  On March 21, 1933, Charles E. Mitchell was arrested at his home for tax evasion. At his arraignment, he proclaimed in a loud, clear voice, “Not guilty.” Standing by his side was Max Steuer, the greatest trial lawyer of his day, the man who had twenty years earlier won the acquittal of the owners of the Triangle Shirtwaist Factory on manslaughter charges, the man who had convicted the executives of the Bank of United States, and the man Norbeck’s staff wanted to hire to run the investigation. Steuer reportedly made a million dollars a year and, after years of winning one hopeless case after another, he was offered far more cases than he could actually take. He could afford to be choosy. “I take only,” he said, “criminal cases when the client is innocent. . . . Having right on my side, I ought to win most of the time.” That was not exactly true—sometimes Steuer took cases for the money; the word around Wall Street was that he had demanded a $100,000 retainer from Mitchell and that Mitchell was so strapped for cash that he had to pass the hat among his friends to raise it. Steuer was also known to take cases for the challenge; he took them because no one said they could be won and he won them anyway. And with preachers in New York decrying tax evasion as “unchristian” and “injurious to the spiritual health of the nation,” this one certainly looked like a lost cause. Whatever the reason, Steuer the legal magician was now representing Sunshine Charlie.18